An Assessment of the Global Soybean Industry: An Application of Stochastic Equilibrium Displacement Model

1. An Assessment of the Global Soybean Industry: An Application of Stochastic Equilibrium Displacement Model Rafael de F. Costa, Yan Xia, & Parr Rosson Center for North American Studies (CNAS) Dept. of Agricultural Economics Texas A&M University

2. Objective • Analyze and Quantify the Impact of Reduction in Transportation Costs in Brazil and LDP in U.S. on the World Soybean and its Joint Products with Alternative Scenarios.

3. Overview • World Soybean Industry Market and Barriers to Free Trade - World Soybean Production and Exports - Barriers to Free Trade • Methodology • Scenarios and Results • Conclusions

4. World Soybean Industry Source: PS&D, FAS/USDA

5. World Soybean Industry Source: PS&D, FAS/USDA

6. Export Cost Competitiveness

7. Export Cost Competitiveness (Cont.) Source: ERS/USDA (2006), Schnepf et al., Rebolini (2005), Conab (2006) Paraná State Department of Agriculture (SEAB) (2006), CIF Rotterdam prices (FAS/USDA, 2006); U.S. FOB Gulf port prices (ASA, 2006); U.S. producer price (NASS/USDA, 2006); Argentinean internal transportation and marketing costs to port: Schnepf et al. and Lence; Brazil FOB prices are from Rio Grande (Safras and Mercado) and Paranagua (Reuters) (FAS/USDA, 2006).

8. Conceptual Analysis of Transportation Costs Reduction in Brazil Brazil World Importing Countries Competing Exporting Countries PSB PSB PSB PSB SB’ SCE S o y b e a n DIC SIC DCE DB SB ESSB PC PC PC’ ESSB’ PC’ PC’ PC” PC EDSB 0 0 0 0 Q1 Q2 Q3 Q4 Q5 Q6 QSB QSB Q7 Q8 Q9 Q10 QSB Q11 Q12 Q13 Q14 QSB SB’ SB SIC SIC’ SCE SCE’ PJP PJP ESSJP PJP PJP DIC (?) DCE DB ESSJP’ J. P. (?) Pw (?) (?) Pw’ (?) EDSJP (?) 0 0 0 0 Q15 Q16 QJP Q17 Q18 QJP Q19 Q20 QJP Q21 Q22 QJP Initial situation Reduction in TC

9. U.S. Farm Program • Direct Payment - Fixed - Decoupled from current production (ERS) • Counter-Cyclical Payment - CCP rate = Target Price - (DP rate + max {loan rate, price}) - Reduce revenue variability and risk • Marketing loan (Loan Deficiency Payment) - Fixed - Directly coupled to current production

10. Methodology – Theoretical Considerations • Model is based on the modern economic consumer and producer theory • Nonjointness of production is assumed • Given perfect competition, by Sheppard’s lemma, output supply and input demand were: P = AC(W) X = X(W, Z) where AC is average cost function, P is output price vector, W is the input price vector, X is input vector, and Z is output vector.

11. Methodology – Analytical Model • Based on previous considerations, a model was developed to reflect the linkage of soybean and its joint products. • Six country-groups: (i) exporters – U.S., Brazil, and Argentina; and (ii) importers – EU, Asia (Japan and China), and ROW.

12. Consumption (1) MDj = MDj (PMDj, PMMj) (2) ODj = ODj (PODj, POMj) (3) MMj = MMj (PMDj, PMMj) (4) OMj = OMj (PODj, POMj) Production (5) PMDj = AC (PBj, PBi) (6) PODj = AC (PBj, PBi) (7) PMSi = AC(PBi) (8) POSi = AC(PBi) Methodology – Analytical Model I. Soybean joint products (soymeal and soyoil) II. Soybean • Supply • (11) BSi = BSi (PBi, ai) • Demand (9) BDi = BDi (MSi, OSi, PBi) • (10) BDMj= BDMj • (MSj, OSj, PBi, PBj)

13. Methodology - SEDM • Stochastic Equilibrium Displacement Model (SEDM) • Total Differential of Each Equation in the Model and Express them in the Form of Relative Change and Elasticities • Data were Obtained from PS&D/FAS/USDA, CONAB (Brazil), and SAGPyA (Argentina)

14. Results: Scenario 1 – 15% Reduction in TC in Brazil Exporters(%-change) Brazil Soybean Supply (0.06,0.07) Brazil Soymeal Supply (0.003,0.004) Brazil Soyoil Supply (-0.004,-0.003) Brazil Soybean Export Price (-0.19,-0.17) Brazil Soymeal Export Price (-0.063,-0.055) Brazil Soyoil Export Price (-0.041,-0.036) Importers(%-change) Asia Imp. Demand for Soybean (0.01,0.02) Asia Imp. Demand for Soymeal (-0.03,-0.02) Asia Imp. Demand for Soyoil (-0.016,-0.014) EU Imp. Demand for Soybean (0.001,0.009) EU Imp. Demand for Soymeal (0.006,0.007) EU Imp. Demand for Soyoil (-0.007,-0.002)

15. Results: Scenario 2 – Scenario 1 plus 5% Decrease in U.S. LDP rate Exporters(%-change) Brazil Soybean Supply (0.06,0.07) U.S. Soybean Supply (-0.031,-0.005) Brazil Soymeal Supply (0.003,0.005) U.S. Soymeal Supply (-0.001,0.014) Brazil Soyoil Supply (-0.001,0.004) U.S. Soyoil Supply (0.0002,0.0034) Brazil Soybean Export Price (-0.19,-0.17) U.S. Soybean Export Price (0.042,0.146) Brazil Soymeal Export Price (-0.063,-0.055) U.S. Soymeal Export Price (0.018,0.065) Brazil Soyoil Export Price (-0.041,-0.036) U.S. Soyoil Export Price (0.01,0.04) Importers - No significant changes compare to previous scenario

16. Conclusions • Soybean • Brazil is less efficient in TC compared to U.S. • If TC decreases in Brazil, Brazil‘s soybean supply increases soybean export price decreases • For the U.S., decrease in LDP rate reduces supply export price increases • Asia and EU import demand increases • Brazil gains competitiveness • U.S. loses competitiveness • No significant changes in Argentina

17. Conclusions • Soybean Joint Products • Regarding supply, Brazil suffers diverging results: For Scenario 1, Soymeal supply up and Soyoil supply down. In Scenario 2, both increases • As for export prices, decrease for both products Brazil more competitive • U.S.’s soymeal and soyoil export prices increases, becoming less competitive • Asia import demand for joint products were down, but EU does not change significantly • Again, no significant changes in Argentina

18. Questions? Rafael de F. Costa Ph: 979-845-7221 E-mail: rfcosta@ag.tamu.edu